Highlights

• We left Axis REIT 2Q15 analyst briefing feeling neutral with slight positive bias given its challenging outlook but with progressive measures in place to handle the situation.

• As revenue and expenses grew in tandem with increase in number of properties (1H14: #30 vs 1H15: #34), we also seen some positive improvement in terms of efficiency ratio from 14.6% in 1H14 to 16.0% in 1H15.

• While management admitted that leasing activities are tough at the current situation, occupancy rate for the port folio has been fairly stable at 92.7% in 2Q15 vs. 92.6% in 1Q15. Note that out of 34 properties, 23 of them are 100% occupied as at 2Q15.

• 55% of tenancies due in 2015 has been renewed and we understand that leases in the port folio achieved a positive rental reversion of 7.8%.

• Management also shared on asset enhancement initiatives which focused on Axis Business Park (Block C), The Annex (proposed to convert into 6-floors building), as well as Axis Business Centre which involves creation of new block with additional 60,000 sq ft into the property.

• There is no clear timeline on signing of SPAs for Haisan cold chain logistic facility at Port Klang as well as Electronic Manufacturing facility at Indahpura, Johor. In addition, there are seven properties that are currently under assessment for future acquisition with total estimate value of RM270m.

• Proposal on share split (1:2) will be tabled to unitholders during EGM which will be held on 21st August 2015.

Risks

• High concentration on logistic warehouse, office / industrial and manufacturing facilities subject Axis REIT to risk of significant slowdown in economic activities.
• Slower rental reversion (only 2 – 3% per annum) as compared to other M-REITs (5 – 7% per annum).
• Rise in interest rate will shift investor’s appetite from RE IT sector to government bonds.
• REIT sector could underperform in a bullish market as investors would prefer stocks which give higher capital appreciation.

Forecasts

• Unchanged.

Rating

HOLD , TP: RM3.44

Positives

• We like the uniqueness of the trust given its exposure to industrial properties unlike the other players of M-REITs which are either retail or office or combination of both andability to continuously add yield accretive assets.

Negatives

• Highly specialised portfolio on industrial / manufacturing properties makes Axis REIT the most sensitive to adverse changes in macroeconomics.

Valuation

• Maintain HOLD recommendation on the stock and our TP remain unchanged at RM3.44.
• Targeted yield remain unchanged at 5.5%, 1.5SD below historical average yield spread of Axis REIT and 7-year MGS.

Source: Hong Leong Investment Bank Research - 5 Aug 2015